The pattern of retreat and reversal with the euro-dollar follows similar patterns in equity markets. Similar patterns are more fully developed and this suggests a continuation of the current uptrend towards $1.49. This trajectory is inhibited by several factors.
The euro-dollar chart is defined by three significant support and resistance levels. These provide the framework or context for the volatility moves. These large volatility moves have become a defining feature of currency markets. Moves of the order of the mid 2010 rise from $1.26 to $1.41 are no longer unusual.
The strength of the current rising trend is confirmed by the relationships shown in the Guppy Multiple Moving Averages indicator. The euro rise is supported by investor sentiment. The longer-term investors in the market, shown by the group of red moving averages, have turned upwards indicating confidence in the rising trend. The traders, shown by the blue group of averages are well separated indicating increasing confidence in the trend direction and longevity.
Comparison with the dollar index chart suggests that the euro-dollar rise is predicated on dollar weakness and not necessarily on euro strength.
The next resistance target level for euro-dollar is near $1.49. Progress towards this target is limited by the uptrend line starting from the 2010 low near $1.18. This line acted as a support level until November 2010 when the price moved below the trend line. After November 2010 the trend line has acted as a resistance level. The euro-dollar has consistently reacted away from this trend line. The same type of behavior is likely to prevail as the euro-dollar moves above the resistance level near $1.41.
A retreat towards the lower edge of the short term GMMA near $1.37 remains consistent with the uptrend. The $1.37 is a well-established support level shown by line B. This trending behavior has well defined strength. The passage of the trend in moving towards the next resistance level near $1.49 is limited by the resistance features of the long-term uptrend line.
Currencies, and in particular the Euro zone, are always at the mercy of politics.
Policy changes do have an immediate impact on currency trends so it is important to identify the location of support and resistance features. The policy U turn may lead to a currency U turn, but the turn often pauses at well-defined resistance levels.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.